Annuity.org partners with outside experts to ensure we are providing accurate financial content.
These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.
Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.
Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.
APA Zimmermann, S. (2021, March 24). Basis Points. Annuity.org. Retrieved January 16, 2022, from https://www.annuity.org/annuities/rates/basis-points/
MLA Zimmermann, Sheena. "Basis Points." Annuity.org, 24 Mar 2021, https://www.annuity.org/annuities/rates/basis-points/.
Chicago Zimmermann, Sheena. "Basis Points." Annuity.org. Last modified March 24, 2021. https://www.annuity.org/annuities/rates/basis-points/.
Basis points are simplified units of measure that express percentages in finance. Equal to 1/100th of 1 percent, a basis point gives a more precise measure of interest rate changes, which despite sometimes seeming small, often translate to significant dollar values. When disclosing annuity fees and interest rate spreads, insurance companies typically use basis points.
Why You Can Trust Annuity.org
Our Partnerships, Vision and Goals
We partner with Senior Market Sales (SMS), a market leader with over 30 years of experience in the insurance industry, to offer personalized retirement solutions for consumers across the country. Our relationship with SMS (and Insuractive, the company’s consumer-facing branch) allows us to facilitate the sale of annuities and other retirement-oriented financial products to consumers who are looking to purchase a safe, reliable solution to fill gaps in their retirement income. When we produce legitimate inquiries, we get compensated, in turn, making Annuity.org stronger for our audience. Readers are in no way obligated to use our partners’ services to access Annuity.org resources for free.
SMS and Annuity.org share a common goal of educating consumers and helping them select the most appropriate product for their unique financial and lifestyle goals. Our network of advisors will never recommend products that are not right for the consumer nor will Annuity.org. Additionally, Annuity.org operates independently of its partners and has complete editorial control over the information we publish.
Our vision is to provide users with the highest quality information possible about their financial options and empower them to make informed decisions based on their unique needs.
Banking, accounting and other financial sectors use basis points to express interest rate changes and rate spreads. These industries often refer to basis points as “bps” or “bips.”
Basis points are useful when discussing interest rates and other percentages, such as the cost of annuity riders or administrative fees, of less than 1 percent.
Why Use Basis Points Instead of Percentages?
Basis points are convenient and steady. Basis points are less ambiguous than percentages as they represent an absolute, set figure instead of a ratio.
For example, a 1 percent increase on a 5 percent interest rate could be interpreted as either 5.05 percent or 6 percent.
Conversely, if the rate increases by 100 basis points, the result is constant. The rate updates to 5.01 percent.
Price Value of a Basis Point (PVPB)
One basis point equals 0.01 percent or 0.0001.
You can use a calculator or simple arithmetic to convert basis points to a percentage and, likewise, percentages to basis points.
How Do Annuity Providers Use Basis Points?
Annuity providers use basis points to denote incremental annuity rate changes. They also use basis points to express the difference between two interest rates. When calculating the interest that should be credited to an indexed annuity with a rate spread, annuity issuers use basis points to determine the change in the index and subtract the spread.
Basis points also reflect annuity fees, and they serve as an important consideration when comparing annuity products. Charges such as agent commissions, administrative fees, surrender charges and mortality expenses are often listed in basis points in initial contracts. Understanding basis points can help consumers quantify or calculate the financial impacts of these fees.
How Do Investors Use Basis Points?
Investors use basis points to convey the costs of mutual funds and other exchange traded funds.
Basis points impact a myriad of financial instruments, including treasury bonds, corporate bonds, common stocks and mortgage loans.
Investors also apply basis points as a consistent means to compare expenses and certain funds’ fees. Basis points can express an asset’s change in value. Prevailing interest rate adjustments, even by one mere basis point, can have a significant impact on bonds and other investments.
These basis points, although they represent only one one-hundredth of a percentage point, can have big dollar implications for institutions and individuals.
4 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- Constable, S. (2013, September 4). What is a Basis Point and Why Is It So Important? Retrieved from https://web.archive.org/web/20161009013236/https://www.wsj.com/articles/SB10001424127887324823804579017141254359828
- Corporate Finance Institute. (n.d.). Basis Points (BPS). Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/basis-points-bps-definition/
- Lewis, J. (n.d.) What Does Accounting Basis Points Mean? Retrieved from https://smallbusiness.chron.com/accounting-basis-points-mean-38158.html
- Omni Calculator. (2021, February 10). Basis Point Calculator. Retrieved from https://www.omnicalculator.com/finance/basis-point